Monday, January 17, 2011

To understand the fraud at the heart of the Social Security Trust Fund, we start with a very simple fact: cash can only be spent once.

There are two frauds at the very heart of the Social Security system, and I am going to describe and source them in detail. After spending a number of hours poring over public data from the Social Security Administration (SSA), The U.S. Treasury and the Congressional Budget Office (CBO), and additional hours searching the Web for other published analyses, I can state with some authority that there are no published analyses or accounts of Social Security which incorporate the actual outlays and receipts from fiscal year 2010 in a context which includes the Social Security Trust Fund.

In other words, all published analyses are based either on SSA or CBO estimates, not the actual numbers from the Treasury, and all media reports I could find are simply cut-and-paste repetitions of these estimates.

I cannot find a single source which provided any evidence of digging through the data and assembling a coherent picture of the Social Security system.

The media simply repeats "conclusions" published by "official sources" based on estimates, not facts. The laziness this implies is staggering. Meanwhile, pundits such as Paul Krugman and Robert Reich, however knowledgeable and talented they may be, have obviously never performed a single minute of original data collection and analysis of the voluminous public accounts available to anyone with a computer and web browser.

If this is the best our most prestigious pundits and media resources can manage, then we truly are in dire straits.

All claims that Social Security is "secure for decades" are based on bogus fantasy-estimates, as are claims that the Trust Fund is anything but a carefully contrived fraud. I am rather shocked--and I don't shock that easily--that it comes down to me, the classic independent-journalist "blogger in old blue jeans" to actually assemble the data and draw the simple common-sense conclusions which reveal Social Security as a fraud with two components: the bogus estimates, and the bogus Trust Fund.

Let's start with the CBO report, which begins with an excellent summary of the Social Security system:

Social Security is the federal government's largest single program. About 54 million people currently receive Social Security benefits. About 69 percent are retired workers, their spouses, and children and another 12 percent are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19 percent are disabled workers or their spouses and children; they receive Disability Insurance (DI) benefits. Social Security's outlays in fiscal year 2010 totaled $706 billion, one-fifth of the federal budget; OASI payments accounted for 82 percent of those outlays and DI payments made up about 18 percent.

As anyone who has ever drawn a paycheck in the above-ground economy knows, Social Security is funded by payroll taxes. Surpluses, if any, are placed in the Social Security Trust Fund, a useful accounting fiction which is comprised of two trust funds, one for each component of Social Security: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).

The trust funds run surpluses in that the amount paid in by current workers is more than the amount paid out to current beneficiaries. These surpluses are invested in special U.S. government securities, which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit.

What this description fails to explain is the Social Security surplus is transferred to the Treasury to be spent, and in exchange for the cash the Treasury deposits special "non-marketable securities" in the Trust Fund: in essence, IOUs, not actual Treasury bonds.

This "debt" to Social Security is called "intragovernmental holdings," and it is included in the total national debt, as shown here in these Treasury documents:

Here is the exact total of Trust Fund holdings via the SSA: Trust Fund Data. As of December 2010, the Trust Fund held $2.6 trillion in various non-marketable securities.

For context, note that total household net wealth in the U.S. is $54.9 trillion, according to the latest Fed Flow of Funds (see page B100)

To understand the fraud at the heart of the Trust Fund, we start with a very simple fact: cash can only be spent once. As a thought experiment, let's assume the Social Security was an actual Trust Fund rather than a simulacrum fund. The actual Trust Fund would be larger version a PIMCO bond fund.

In other words, the Trust Fund would accumulate $1 trillion in cash surpluses and invest it in bonds--just like the PIMCO bond funds. Note the word cash. Employees and employers pay their Social Security taxes in cash, out of their cash earnings and receipts. The surpluses are also cash.

The Trust Fund would then buy bonds of various maturities and types with that cash. For the sake of our thought experiment, suppose the Trust Fund were free to invest its cash in securities from major central banks, including the U.S. Treasury.

The Trust Fund would hold marketable securities which could be liquidated at will in the vast global bond market. Recall that global financial wealth is on the order of $160 trillion (estimates are just that), with U.S. households holding about a third of that ($55 trillion). So the total Social Security Trust Fund of $2.6 trillion is not all that large on a global scale.

When Social Security outlays exceeded receipts (as they did in 2010--see below), then the Fund would sell bonds for cash. Note the word cash. The U.S. Treasury and U.S. taxpayers would have nothing to do with the Fund beyond paying in their payroll taxes in cash.

Now compare that real Trust Fund with the simulacrum one we have. In the bogus "Trust Fund," the cash has been siphoned off and spent on Federal government outlays. The Fund holds no cash. Instead, it has been given IOUs "backed by the full faith and credit of the United States," the non-marketable securities.

Now what happens when the Social Security system redeems $100 billion of those securities? the Treasury goes out and borrows the $100 billion on the global bond market, and taxpayers are on the hook for the debt and the interest on that freshly issued debt.

This isn't that difficult to understand, so let's go through it again:

In the real Trust Fund, taxpayers pay in their cash, and the surplus cash is invested in marketable bonds. That cash is then withdrawn later, as needed, via the sale of bonds purchased with the cash. Taxpayers (employees and employers) pay nothing above and beyond their payroll taxes to fund Social Security.

In the fraudulent "Trust Fund," taxpayers' Social Security taxes have been squandered on other Federal expenses, and they have to pay interest on Treasury debt which is borrowed to pay their SSA benefits. In other words, taxpayers pay twice: once via Social Security taxes, a substantial 12.4% of all wages, and then they pay again to borrow cash on the bond market to actually pay the Social Security benefits.

You can only spend cash once, and filling the drained coffers with borrowed money that accrues interest is making the taxpayers pay for their Social Security benefits twice over. In effect, the $2.6 trillion in "Trust Fund" bonds are simply markers for actual Treasury bonds which must be sold, and interest must be paid on. Taxpayers will have to pony up hundreds of billions of dollars to pay the interest on that $2.6 trillion in newly issued Treasury bonds.

Here's another thought experiment. In the fraudulent "Trust Fund" we now have, when the Social Security system outlays exceed its tax-receipts income, then the Treasury sells freshly minted bonds and transfers the cash to Social Security.

If we eliminated the fiction of the Trust Fund, then what happens? The exact same thing: when the Social Security system outlays exceed its tax-receipts income, then the Treasury sells freshly minted bonds and transfers the cash to Social Security.

Since nothing is different if the simulacrum Trust Fund exists or not, then clearly it is an accounting fraud. The bottom line is the cash was spent on non-Social Security programs, and the taxpayer is thus paying for his/her Social Security benefits twice over: once in cash payroll taxes, and again to pay the interest on the Treasury debt issued to replace the Social Security surplus cash that was spent.

The second half of the fraud is the bogus estimates which proclaim a false security that is simply not backed up by facts. I'm going to run through the numbers drawn from the SSA and the Treasury; you can verify them on the links listed at the start of this essay.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037.

Here are Trustees' estimates for when the system's outlays exceed its income:

First year outgo exceeds income excluding interest: 2015

First year outgo exceeds income including interest: 2025

Year trust funds are exhausted: 2037

Now here are the real numbers for fiscal year 2010, alongside the SSA's estimates.

The Treasury figures are for tax receipts, while the SSA figures include $100 billion in interest from the Treasury (for the non-marketable bonds) for the OASI fund and $10 billion in interest on the holdings of the DI fund. So we add $110 billion to the Treasury's tax receipts for a total of $741 billion:

So the SSA Trustees had estimated $41 billion deficit (excluding interest income) and reality turned out to be $76 billion--almost double their guesstimate. Their estimate of total revenues was too rich by $50 billion as well.

If the SSA blows the estimate for the fiscal year ending in October this badly in August of the same year, what faith can we plausibly place in their estimates of what will happen in 2025 and 2037? The SSA numbers published in the August 2010 report estimated that outlays would not exceed revenues (excluding interest income)until 2015--yet outlays already exceeded income by a staggering $76 billion in 2010.

Their estimates for "First year outgo exceeds income including interest" being 2025 are suspect, too, once you examine their insanely rosy expectations of future revenues. Recall that their revenue estimate for 2010 overshot reality by $50 billion.

SSA's estimate for 2011 income is $855 billion--fully $114 billion more than the actual income logged in 2010. But wait, it gets worse: According to the SSA, the system's income for 2009 was $807 billion ($698.2 billion in the OASI and $109.3 billion in the DI). Real income was $741 billion. That means SSA income registered a massive decline of $66 billion from 2009 to 2010.

So the reality is that tax receipts fell by over $60 billion from 2009 to 2010, and they fell short of SSA estimates by $50 billion. The gap between actual tax receipts and outlays in 2010 was a monumental $76 billion.

Since the SSA's estimate for outlays was quite accurate ($714 billion estimated, $707 billion in reality), then we can take their estimate for 2011 outlays as solid: $742 billion.

Notice that is almost exactly the $741 billion revenue and interest income logged in 2010. the slightest dip in revenues and the slightest increase in outlays would mean that outlays would exceed total income in 2011, not 2025 as estimated by the SSA Trustees.

The consequences of these numbers are gargantuan. Outlays are increasing 3.5% a year or more, while receipts plummeted by 8% from 2009 to 2010, supposedly a "recovery" year in which the economy grew by over 2% per annum.

Relying on these pie-in-the-sky estimates to judge the system "secure and solvent until 2037" is a massive fraud. I invite you to study all the data presented above, and pore over the source documents at length. You will be forced to conclude the following:

1. The estimates are so far off from reality, even those looking a mere one year ahead, that they are useless if not outright dangerous/fraudulent.

2. The Social Security system's outlays are rising far faster than previous estimates and the economy as a whole as Baby Boomers retire at 62 rather than hang around to 66 to collect their full benefits.

3. The Social Security system's income is cratering, with no evidence to support the notion that the "recovering" economy is generating higher SSA receipts. Indeed, the data is conclusive: SSA income fell by a massive $66 billion decline in just one year, 2009 to 2010.

4. The Trust Fund is an accounting fiction, as its disappearance would make no change in the reality that the Treasury has to borrow money on the global bond market to fund Social Security's growing shortfalls between receipts and outlays.

The bogus Trust Fund and absurdly optimistic estimates constitute two fundamental frauds at the heart of the Social Security system. Forget the delusional propaganda estimates and look at the actual Treasury data for outlays and receipts. The system is not "secure;" it ran a $76 billion deficit in 2010, and it is on track to run a deficit in 2011 that it was not supposed to reach until 2025.

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